Amortization explained
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- čas přidán 5. 08. 2024
- What is the meaning of the financial term amortization in financial statements? Let’s discuss the definition of amortization, review how large the annual amortization expense is for several large and well-known companies, and even take a look at the amortization journal entry.
It is not unusual for large multinational companies to have amortization expenses of $1 billion or more per year, and most of the amortization expenses seem to have something to do with intangible assets.
⏱️TIMESTAMPS⏱️
0:00 Introduction to amortization
0:20 Amortization real life examples
1:58 Amortization vs depreciation
2:37 Amortization definition
3:16 Amortization journal entry
3:52 Accumulated amortization
4:29 Amortization expense in the income statement
In order to grasp the concept of amortization, it is important to realize that amortization is the “sister” of depreciation. Depreciation is the accounting process of allocating the cost of tangible assets to current expense in a systematic and rational manner in those periods expected to benefit from the use of the asset. For example, tangible assets like buildings, machines, and trucks get depreciated. You buy a fixed asset for $100,000, expect to use it for 5 years, so you take $20,000 depreciation expense in each of those 5 years.
Amortization is very similar to depreciation, just change “tangible assets” in the definition for “intangible assets”: amortization is the accounting process of allocating the cost of intangible assets to current expense in a systematic and rational manner in those periods expected to benefit from the use of the asset. So while tangible assets get depreciated, intangible assets like patents, licenses, software, and capitalized research and development get amortized.
Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers training in various formats: CZcams videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!
Enjoyed this video? Then subscribe to the channel right now, and let's walk through some examples of intangible assets: czcams.com/video/-TzaG-VD2GU/video.html
@Samrat R.m Depreciation is for tangible assets, amortization for intangible assets.
One goes up and ones goes down
Thank you, I was stuck here while analyzing balance sheets! Great explanation
Hello Devyn! Welcome to the channel. I have more tutorials covering various aspects of the balance sheet: czcams.com/video/ya7rRZJCLEc/video.html Enjoy, and let me know what you think! Also, the EBIT-EBITA-EBITDA video might be an eye-opener: czcams.com/video/nImp51zYcy4/video.html
Such a great video, thank you so much! Your explanation was simple and straightforward, and I appreciate that you also included a section for the actual booking of amortization
Glad you enjoyed it, Vanessa! Happy to help. 😎
The minute you mentioned sister of depreciation and it is the depreciation of intangible assets. My brain went BOOM
Hello Zanithan! I hope that was a BOOM as in "now I get it", instead of "BOOM, out goes the light". ;-)
@@TheFinanceStoryteller 😅😅😅 i get it now. Thank you for your videos sir
Happy to help! Enjoy the whole collection of videos on the channel, and please spread the word!
Exactly that was the moment just the difference is tangible assets and intangible assets
The best explanation on the internet
Thank you! Happy to hear that.
Thank you very much for this information.
You're welcome, Mani! Happy to help. Please be aware that there are multiple uses of the word amortization. I use it in this video in relation to amortization of intangible assets, others might talk about loan amortization which is a completely different thing.
hey, please explain amortized cost in the perspective of financial instruments. Your work is admirable.
Thanks for the kind words, Baila. Amortized cost in the perspective of financial instruments is not an area I am personally familiar with, so I am sorry that I cannot answer your question.
Very Useful
Thank you for the kind words!
Ty 👏👏👏👏👏👏👏👏I get it now.
You're welcome! Nice to hear that.
well explained..
Thank you!
why do we need to amortize or depreciate? and when do we amortize and depreciate? Thank you! your answer will be so much appreciated:)
Check the definitions at timestamp czcams.com/video/ci72a_SzFcQ/video.html and you will know the answer!
Learning in 2024
How did this relate to buildings bought on loan?
The link could be a term called an "amortization schedule": a complete table of periodic loan payments, showing the amount of principal and the amount of interest that comprise each payment until the loan is paid off at the end of its term.
I am a passionate follower of you channel and I am taking Fnance cource at uni and I study here with you. What I want to ask is that when making an investment decision amortization time is considered. I dont quite understand. thanks
The type of amortization I cover in this video is related to intangible assets on the balance sheet. What I think you are referring to is a loan amortization schedule, which is a very different topic (and I am not the one that can give you a really good explanation of it).
@@TheFinanceStoryteller Don't you have videos that explain loan amortization schedule ???
Hello Farida! No, sorry, I don't.
Is Preliminary expenses are amortized?
Yes, you could call the spreading of prepaid expenses over the months to which they apply either "amortization" or "allocation". czcams.com/video/hUz39T8-V1I/video.html
But why does the amortization reduce the profit?
Hi Marina! Amortization is an expense line in the income statement. The higher expenses are, the lower the profit. See also my video on EBIT-EBITA-EBITDA czcams.com/video/nImp51zYcy4/video.html
How is this related to bonds issued at a discount or premium
It isn't. At least not in this video. I am discussing amortization here in the sense of taking a part of the intangible assets off the balance sheet into the P&L as expense.
@@TheFinanceStoryteller I see, thanks for the reply, do you know how amortization of bonds work or have a video explaining it?
Nope, that's not my area of expertise.
@@slavicnation5523 I think you are talking about more in Accounting terms with buying bonds on Premium/Discount and their amortization rate. Here is a good video that I think should be able to help you understand what you are talking about. czcams.com/video/ccizdFxUUYU/video.html
`what is amortixation deposit?
I don't know what that means, but it probably has to do with the other use of the word amortization in the context of loan payments. In the video I made on amortization, I talk about amortization of intangible assets in accounting, which is something completely different.
How is an amortization relevant to the accountant
It can have a huge impact on profitability (net income), but not on cash flow (CFOA).
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Thank you! Hope you like the content too.
in the last part of the video, the weighted average amortization period is 3.4 years. I don't understand the breakdown you used to explain that because in the breakdown, there are more than 3.4 years accounted for the amortization, exceeding the weighted average amortization period
Hello Radhy! I didn't calculate the 3.4 years myself, it comes straight out of the annual report of Apple. If you want to replicate it, you would need to know the date on which each intangible asset was added to the balance sheet, the amortization period for each of them, and then calculate the total amortization per year.
@@TheFinanceStoryteller thank you for your explanation
You should come to Australia as an accounting lecturer😃
That's a long way from home, as I live in The Netherlands. I did enjoy a holiday trip to Australia many years ago, very good memories! Thanks Bruce! 😉
@@TheFinanceStoryteller There are many Dutch Australians in my city, my manager as well, her last name is Vandersaag, is it Dutch last name?
Yes, that sounds very Dutch! It is highly likely that her ancestors may have been in the woodcutting business, running a mill (powered by wind or water) that would drive a mechanized form of woodcutting. The "saag" in the name is probably derived from the verb "zagen" (sawing).